The IRDAI has released a draft to limit insurance commissions and management expenses to curb mis-selling. The move may impact fee-based income for banks and NBFCs, and potentially squeeze profit margins for insurers. Stakeholders have until October 25, 2026, to provide feedback on the proposed regulatory changes.
On September 23, 2026, the Insurance Regulatory and Development Authority of India (IRDAI) released a consultation paper that could reshape the profitability and sales models of the Indian insurance and banking sectors. The proposal, titled 'Recalibrating Economics of Insurance Distribution,' aims to address the rising cost of acquiring customers and reduce instances of mis-selling by capping commissions and limiting the expenses insurers can claim for management.
For years, insurance distribution has been a lucrative source of non-interest income for many banks and non-banking financial companies (NBFCs). These institutions often bundle insurance products with loans, earning substantial commissions and volume-linked incentives in the process. The IRDAI’s draft proposal intends to stop this practice by banning mandatory product bundling and removing volume-based rewards for bank and NBFC staff. This shift directly threatens the fee-income streams that have historically supported the operating profits of various financial institutions.
The draft also proposes strict limits on the 'Expense of Management' (EoM) for insurers. The regulator suggests capping these costs at 15 percent for life insurers within two years and 20 percent for general insurers over five years. By forcing companies to control these operational costs, the regulator hopes to lower the overall price of policies for consumers. However, for insurance companies, this could mean tighter margins or a need to significantly improve operational efficiency to maintain profitability under the new rules.
The market reacted to these proposals on September 24 and 25, 2026, with selling pressure seen in several insurance-related stocks and financial service companies. Investors appear concerned that the move could hurt the bottom line for firms heavily dependent on bancassurance—the arrangement where banks sell insurance products to their customers. Companies such as HDFC Life, ICICI Prudential Life, and various banks that earn significant commissions from insurance cross-selling faced volatility as traders reassessed the potential impact on future earnings.
It is important to note that these proposals are not yet final. The IRDAI has invited feedback from industry stakeholders and the public until October 25, 2026. The final impact on the industry will depend on the version of the rules that is eventually implemented. For investors, the key monitorable is how these companies adjust their business models if the caps become mandatory, and whether the regulator allows for any transition periods to mitigate the immediate impact on profit margins.